Regal Rexnord Corp (RRX) 2011 Q1 法說會逐字稿

Good morning and welcome to the Regal Beloit first quarter 2011 earnings conference call. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). I would now like to turn the conference over to John Perino. Please go ahead, sir.

Good morning, Jill, and welcome to the Regal Beloit first quarter 2011 earnings conference call. Joining me today are Mark Gliebe, President and CEO, Jon Schlemmer, Vice President and Chief Operating Officer, and Chuck Hinrichs, Vice President and Chief Financial Officer. Before turning the call over to Mark, I would like to remind you that the statements made in this conference call that are not historical in nature, are forward-looking statements.

Forward-looking statements are not guarantees, since our inherit difficulties in predicting future results and actual results, could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release and our filings with the SEC. Now I'll turn the call over to Mark.

Welcome everyone, and thank you for joining the call and thank you for your interest in Regal Beloit. We'll follow our normal approach, I'll give some opening comments, Chuck Hinrichs will give you a financial update and overview, and Jon Schlemmer, our new Chief Operating Officer, will give you color on the products, markets and operations, and I'll follow with the second quarter outlook and today will give you some additional comments on our current view of the EPC transaction, and after that we'll have some Q&A.

Overall, the first quarter turned out to be slightly better than the high-end of our guidance. The strength came from our top line which benefited from the general economic recovery, as well as the additional business from the acquisitions we completed in 2010. The big headwinds came from commodity prices and acquisition-related expenses, primarily related to our pending acquisition of A. O. Smith's EPC business. Regarding commodities, copper was somewhat volatile in the quarter, bouncing between 415 and 440.

If any case, it was well above last year's 327 average for the quarter. Steel inflation started to really affect us in the quarter, and we expect significant steel inflation throughout the second and third quarters. The price increase we announced in February, which was the second increase in six months, did not take effect until the first week of March, so we did not have a full impact for the quarter. Additionally, a few of our OEM agreements have a one-quarter lag, so we'll start to see the benefits of those increases in the second quarter.

Further, we will never let up driving cost productivity to help our customers off set the inflation. The commodity inflation is a frustrating situation for us and for our customers, and we need to continue to stay very close to it. Our margins were reduced in the quarter by about 70 basis points due to the acquisitions, but inline with our expectations. We would expect to see further margin improvements from these acquisitions, as we implement the synergies and drive improvements in the businesses.

Regarding the HVAC business, after a weaker than expected fourth quarter, the first quarter demand started out quite strong. Demand has since moderated somewhat. The good news is that even with the strong volume in the first quarter, our customers are indicating to us that inventories are at the desired level as we enter the cooling seasons.

On other fronts, we continue to see strong demand in our later cycle businesses as well as in Asia. The highlights for the quarter were the acquisition of Ramu, Inc., which John will speak to here in a minute, a continuation of our new energy efficient product launches, and the beginning of our integration planning with EPC. As I mentioned, we will discuss EPC at the close of our prepared remarks today. With that I'll turn it to over to Chuck Hinrichs.

Thank you Mark, and good morning, everyone. We are very pleased with our results for the first quarter 2011, as we posted strong sales growth and solid cash flow from Operations. Sales for the first quarter of 2011, were $663 million, an increase of $155 million or 31% over the first quarter of 2010. Sales growth in the first quarter was due to the addition of $91 million of sales from the 2010 acquired companies, volume growth, and realizations from the fourth quarter price increase.

Our gross profit percentage for the first quarter of 2011 was 24.9%,an improvement from the fourth quarter 2010 margin of 23.4%,and down slightly from the 25.8% in the first quarter of 2010. I want to focus on two issues impacting our gross margin.

Our pricing actions and the continued run-up in commodity input prices. First let me comment on our pricing. In the fourth quarter of 2010, we announced price increases that were effective in December. The majority of that price increase was realized in the first quarter of 2011, offsetting only a portion of the commodity inflation we experienced in 2010.

There's typically a lag effect or a timing difference in the recognition of a price increase, versus the commodity cost inflation. We continued to experience commodity cost inflation in the first quarter of 2011, which will be partially offset by the realization of the current price increase being implemented.

In summary, we announced two price increases over the last six months to help offset the commodity cost inflation we are experiencing. Let me give you some data on the cost inflation on two key commodities, copper and steel. The average spot copper price for the first quarter of 2011 was $4.39 per pound, an increase of $1.12,or 34% compared to the first quarter of 2010, and an increase of $0.46 or 12% compared to the fourth quarter 2010.

Market estimates are for copper prices to remain at elevated levels, at $4.25 per pound during this second quarter. Now let me share with you the information on the steel market. Here I am quoting spot prices for cold rolled steel.

The average price in the first quarter of 2011 was $904 per ton, an increase of $189 per ton, or 26% compared to the first quarter of 2010, and an increase of $239 per ton, or 36% compared to the fourth quarter of 2010. Market estimates are for steel prices to increase further, to $926 per ton in this second quarter.

As these are our two largest raw material inputs, the pressure on our gross margins is significant. Slide number seven provides additional financial data. Our capital expenditures in the first quarter were $28 million, a big increase over our normal spend, as we previously communicated, we have three big capital projects in 2011.

The first one, which closed in the first quarter, was the purchase of our previously leased factory in Hyderabad, India. In the second half of this year, our capital spending will be higher as we undertake the relocations of two of our factories in China. Our depreciation and amortization was $21.6 million in the first quarter of 2011, and should be approximately $22 million in the second quarter.

As referenced in our press release, we are incurring higher acquisition related costs. In the first quarter of 2011, we expensed $7 million of costs, $5 million higher than in the first quarter of last year, and $4 million higher than in the fourth quarter. Our tax provision was 31.2% in the first quarter of 2011, and consistent with our guidance for 2011 of 31% to 32%.

Turning to the balance sheet, our quarter-end cash position was $260 million, an increase of $29 million from the year-end level. Our balance sheet remains strong, with excellent liquidity and financial flexibility. For the second quarter of 2011, we expect earnings to be in the range of $1.22 to $1.28 per share.

In the second quarter we'll see improving sales volume and increased realizations from the first quarter 2011 price increase, but we will also experience increased costs for our commodity inputs. Now I will turn the call over to Jon Schlemmer.

Thanks, Chuck, and good morning, everyone. During the first quarter of 2011 we experienced high single digit to double digit sales growth in almost every business and region. Our mechanical businesses which compete in the later cycle segments, continued their strong rebound in the quarter, with double digit sales growth.

Sales in Asia also up double digit, driven by robust economies in China, India, and also Australia. The strength that we've seen in the prior four quarters in our North America commercial and industrial businesses continued through the first quarter with sales up 13%. During the quarter we continued to see a gradual shift to more energy efficient NEMA premium products as the pre ISA inventories continued to decline. We expect the transition to NEMA premium products to be substantially complete by the end of the second quarter.

In HVAC, we experienced a strong start to the year as customers rebuild inventories coming out of their year end slower period. We did see a modest and favorable mixed shift towards more standard products, as a result of the reduction in the value of the federal energy efficient rebates provided to consumers. However, customers remain optimistic that we won't see a complete shift back to the old buying patterns. Channel inventories appear reasonable with sell-through.

Unfortunately, the US housing market does continue to struggle, and overall customers are not quite as optimistic as they were in the first quarter. Commodity and inflation remained a headwind in the quarter. As your may recall, we announced price increases ranging from 5% to 8% that went into effect in the first week of March. That increase, along with our fourth quarter 2010 increase, is helping to offset copper and steel inflation that we've been experiencing. As Mark mentioned, this period of high commodity inflation is frustrating for both us and our customers.

We continue to work very hard at finding lower cost approaches to producing our products throughout our Company, as well as minding the synergy savings of our new acquisition. However, productivity alone was not enough to offset the inflation we've experienced so we've been forced to increase selling prices to help offset the rising input costs. As Chuck mentioned, the other key headwind for the quarter was the EPC acquisition related costs. While we believe we will experience similar cost in the second quarter, we expect these cost to end with the close of the transaction.

Speaking of EPC, throughout the quarter we worked very hard planning the integration of A. O. Smith's EPC business. We couldn't be more excited about the upcoming marriage of our two businesses. The cultural fit that we hope for appears to be very solid and we're anxious to get to closing.

While we still can't operate as one team until we receive final government approvals, we will be ready to implement the basic integration moves around finance and information technology on day one. Once we do close, then we'll be able to dig into the rest of the integration around sales channels, technology, products, procurement, and manufacturing.

There still remains a significant amount of effort in front of us, but we see tremendous opportunities, and both teams captain wait to get started. During the quarter we closed on the acquisition of Ramu, Inc. Ramu is a small R&D company focused on switch reluctance or SR technology, SR technology can deliver the energy efficiency of ECM type permanent magnet motors without the use of permanent magnets. Many of today's permanent magnets come from rare earth metals, rare earth metals are mined primarily in China today, and there's risk that the price of these materials could increase substantially over the next few years.

Furthermore, the construction of SR motors is similar to standard induction motors which makes the overall cost of an SR motor very competitive. Our goal is to commercialize the technology as quickly as possible, and we'll be reaching out to customers who are interested in working with us to take advantage of this exciting technology. And finally on the acquisition front, during the quarter we closed on the purchase of Hargil Dynamics. Hargil will be a small, but solid extension of our CMG Distribution business in Australia, which sells motors and mechanical components. As you know, we continue to focus our engineering development efforts on energy efficient products.

During the last call, we previewed Unico's new Crank Rod Pump, or CRP for oil and gas applications. Today I want to talk to you about two new energy efficient products. First, our commercial and industrial business recently announced the release of the 48 frame permanent AC motor, or PMAC motor. The 48 frame PMAC motor is being sold through the Marathon Motors business under the Symax brand and the Leeson Motors business under the Platinum E brand.

The 48 frame PMAC is a permanent magnet motor utilizing technology similar to our ECM motors. The product line delivers energy efficiency levels higher than standard induction motors. The product also features high torque and increased power density. The new Symax and Platinum E motors can be used in a wide range of applications wherever induction motors are used, including food processing, material handling, agriculture and commercial equipment applications..

They can be coupled with commercially available drives for application convenience. Our customers are showing strong interest in the new line, and we're excited that we're now able to supply these energy efficient products to the commercial and industrial markets. Next, our Gentech team launched yet another new ECM product. The new ECM motor is targeted for niche applications where users require high speed operation.

The new high speed ECM motor has an operating range of 200 RPM to 1800 RPM while delivering an energy efficiency level of 80%. The increased speed range in this motor makes it ideally suited for niche applications such as commercial kitchen exhaust fans, which are used widely across the restaurant industry. The product also has and application in small duct, high velocity systems that are used in specialized HVAC retrofits. We're seeing a lot of interest from the customer base as these appliances tend to operate 24/7.

ECM motors in these applications can provide energy efficiency and cost reduction benefits. The excitement of the eight acquisitions we announced over the last 12 months is driving real momentum in the Company. We have completed acquisitions that provide Regal Beloit with one or all of the technology, geographic footprint or synergistic benefits that we expect.

In summary, it's exciting right now to be part of this Company, and I feel honored and privileged to have been named the Chief Operating Officer and I really do look forward to meeting everyone that is on the call. With that, I'll turn it back over to Mark.

Thanks, Jon. As we look at the second quarter, we will continue to be challenged by commodity. While copper is still inflationary, steel is our largest concern. However, now that we have our pricing actions in place, we expect to offset most of the current inflation.

As we have repeatedly seen in the past, we simply can't predict with any certainty if, and to what extent commodity cost will continue to run. While commodity inflation is frustrating, we will focus on what we can control. We'll continue to work hard to introduce new products that are aligned with customer and market needs for higher efficiency. We will continue to implement (inaudible) Six Sigma across the Company and accelerate the positive impacts on all aspects of our business. We'll continue to work hard to improve the margins from our 2010 acquisitions by mining the synergies and improving the operations.

We will be working diligently to close the EPC acquisition while continuing to prepare for the integration pre close. We will also continue to pursue an active pipeline of additional acquisition opportunities. Before we end today, we would like to provide a further update on the EPC pending acquisition. As you know, we are in the midst of the DOJ HSR review, and we remain hopeful that the transaction will close before the end of the second quarter.

As Jon mentioned, both teams are working together in non-competitive areas to prepare for the eventual closing. The spirit of engagement between the two teams is very encouraging, and I am confident that I can speak on behalf of both teams to say that everyone is very excited about the marriage. From the A.O. Smith public release, you can see that the EPC team is performing very well and that makes it even more exciting to join our ranks. On the slide, Chuck will walk you through what we know about the financial impact of the transaction so far.

Thank you, Mark. I want to make it clear that our earnings guidance for the second quarter includes our preclosing acquisition expenses, but it does not include any operating results of EPC. After closing on the EPC acquisition, we will provide additional information on future operating results of EPC, and an update on our debt financing arrangements.

I also want to make the point, that given the magnitude of the EPC acquisition, the purchase accounting adjustments will be significant. At this time, I organize these adjustments in the four categories. The first category is the step-up and the inventory valuation. At closing, we will value EPC's inventory at fair-value, which will negatively impact our gross margin as we sell the opening inventory in the first and second quarters, following closing.

Second category involves EPC's commodity and foreign currency hedge book. Under purchase accounting rules, the existing positive value in those hedges will be marked to market at closing, and will not benefit future operating margins. The third area is the valuation of Goodwill and intangible assets. The valuation of EPC's and tangible assets will drive the calculation of the amortization expense, which will impact our future operating margins.

And finally, the transaction fees and expenses associated with the closing on the EPC acquisition, will be recognized at closing. While I'm not able to provide the amounts of these purchase accounting adjustments at this time, I want to remind our investors and analysts of these items.

Now I'll turn it back over to Mark Gliebe.

We'll open it for questions.

Thank you. (Operator Instructions). The first question comes from Steve Sanders of Stevens, Incorporated. Please go ahead with your question.

Good morning, guys good quarter.

Good morning, Steve.

So just first, thinking about pricing and commodities, 2Q versus 1Q, net-net, do you think you'll make progress?

I do. I mean, as we mentioned, our second price increase only went into effect in March, so we didn't see much of the impact of that in the second quarter, so clearly it will begin to come through stronger in the second quarter.

Okay. And then, Mark, we had in this quarter about 37% of the business international, and about I think 18% on the high efficiency side. I'm trying to get a sense of how much of that high efficiency business falls in the international bucket, and the thought process there is with your concentration in Asia you should see higher relative growth there's you should see higher growth in energy efficiency. I am just trying to see how additive those two numbers are.

Well, relative to the energy efficiency piece, I think international markets are somewhat trailing the activity that has occurred in the US, relative to regulations and just the overall demand for energy efficient products, so we won't have the same take rate on energy efficient products today. I do believe that will happen in the years to come. As an example, Europe is actually going through the whole ISA transition that we just went through recently. They're going to go through that later this year, so we won't see the same percentage of sales in energy efficiency today, but in the future it will move in that direction.

Last one for Chuck. On the operating expenses, Q2 sales should obviously be above 1Q, and so we've got some higher variable selling expenses there. You commented that the M&A expense would be comparable 2Q verses 1Q. What factors might offset some those higher expenses in the second quarter, purchase accounting on acquisitions, or anything else that may give you some Opex relief in Q2 versus 1Q?

I think excluding of course EPC, I think purchase accounting on the acquisitions from 2010 are principally behind us. You're right, Steve, there are some variable expenses in our operating expenses commissions, as you referenced, that would increase, but I would expect that we would receive some leverage benefit in the second quarter as the seasonal volume and sales pick up.

I'll just add that I think we'll see some synergy benefit from the acquisitions we've done in 2010.

Okay, thank you very much.

The next question is from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hi, good morning, guys.

good morning.

Can you just, on these acquisition related costs, I guess the $7 million in total, can you just give us a sense of what you thought that would be and what you had incorporated in your 1Q guidance?

Good question, Jeff. I think the actual expense in the first quarter would be some $.02 to $.04 higher than what we had assumed in our guidance.

Okay, that's helpful. And then just on the HVAC, you commented inventories are at good level, you had a good start to the year, but some of your forward looking comments were a little more cautious in saying that your customers were a little less optimistic. Can you expand on that? Do you feel better, worse, indifferent, versus three months ago on the HVAC demand side?

You know, as we were going into the year, the feedback we were getting from our customers was, generally speaking, mid single digit growth rates that we would experience in the year, and now I say the feedback is low single digit growth rate. So I would say their optimism has moderated slightly.

Okay, helpful. And then just lastly on these acquisitions. Any notable positive or negative surprises on the acquisitions you've closed in 2010?

Well, we feel great about all of them. There's been no negative hiccups overall and we feel that the management teams are what we thought they were going into the acquisitions. We're very excited to have the Unico team and the technology that they bring to the Company now a part of our business, and we think there's some interesting longer term synergies with Unico across the rest of the Company, so overall we feel great.

Okay, thanks, guys.

The next question is from Mark Douglass of Longbow Research. Please go ahead.

Hi, good morning, gentlemen, and congratulations to Mark and Jon on moving on up.

Thank you.

Thanks.

The mechanical, it looks like it was up about 17% organically, looks like there is a bit of an acceleration. You mentioned long cycled markets kicking in. Can you talk about what markets were driving that in the first quarter and what your outlook is for those?

Yes, the mechanical business has always been a later cycle business for us. You know, as an example, one of their key markets would be in the agriculture area, but overall general industrial, they'll hit all general industrial businesses following industrial productions, so they're seeing today the strong growth that some of our other businesses were seeing as it came out of the recession.

Yes, it looked like it reaccelerated year-over-year. Was that a surprise to you?

No, I think we've been feeling confident that that business was going to be doing well. I'll make one other mention. It does have exposure to the energy sector, and that was also helpful in the quarter.

Okay, thanks. And then can you talk about all of the acquisitions you've made? It sounds like they out-performed your expectations. What was the relative performance on their own kind of organic basis, did they outperform the corporate average. Sounds like they did.

Well, I would say that they performed inline with our expectations, as opposed to out performing our expectations, and I would say generally across the board. In the terms of organic versus non-organic, the Unico business would have seen strong double digit organic growth just by the nature of the businesses that they're in, while for instance our CMG business would have experienced kind of GDP type of growth rate, that business is located in Australia. Our rotor acquisition, you know, based in Europe, got the benefit of the of late exit of the recession generally speaking in Europe, so they were up strong double digits in the quarter as well.

Thank you, it was very helpful.

The next question is from Josh parkers of MKM partners. Please go ahead with your question.

Hi, good morning, guys.

Good morning.

A couple of things here. Can you remind us what LIFO charges would have been in the first quarter and what they're projected to be in 2Q guidance.

Josh, this is Chuck. First quarter, LIFO charge was not a material amount, and we don't see much of a change in the second quarter as well.

Okay. And then just kind of going back to your comments on A.O. Smith EPC and their solid performance near term. I understand there's still a lot of unknowns out there's, but it does seem like it's performing better than you would have thought. Should we interpret that as upside to that initial accretion estimate?

Well we only see what you see relative to the performance of that business, so it would be premature for us to comment right now on exactly what is happening with their business. At this point, too soon for us to comment.

Okay, that's fair. If I can sneak in one last one on steel, It does seem like we're hearing out there a little bit that more capacity is coming online, scrap costs has rolled over atleast a little bit recently. Are you hearing anything from your suppliers that may suggest we could get a little relief going into the second half?

I would say we don't see relief through Q2 or Q3, but potentially Q4, we understand what you are saying and we would say because we operate on a quarter lag we would start to see that prepares in Q4, if it occurs.

Okay, great. Thank you very much, guys.

The next question is from Christopher Glynn of Oppenheimer. Please go ahead.

Thanks. I want to go through some of the less reoccurring cost items here. It looks like $7 million, maybe $0.12 after tax impact from acquisition related charges. I take it that's distinct from the 70 basis points margins impact from the acquisition that you referred to.

Yes, that's correct, Chris.

Okay. First quarter gross margin did look pretty good, so sequentially we have the seasonal volume leverage and some acquisition integrations. Will we expect sequential improvement in the gross margin?

Clearly we'll benefit from seasonal volume pickup, realization on the current quarter price increase, then the unknown of course will be how the commodity cost will impact that, but I would expect some improvement as well as the improvement from the acquired businesses in the second quarter.

Okay. And then probably premature again, but back to A. O. Smith. We had a guide reference in your December call for the first full year. How do we think about the first half of the first year versus the second half. You have the share delusion right away, presumably the second half is where alot of that accretion is, but would we expect net delusion in the first quarter or two, forgetting about the purchase accounting adjustments.

Chris, it's really too early to give you any kind of guidance. Close to the acquisition date we'll provide some additional input on how we see the second half of the year unfolding for the EPC, again, excluding the purchase accounting adjustments.

Ok, fair enough. Thanks.

The next question comes from Jaime Sullivan of RBC RBC Capital Markets. Please go ahead.

Hi, good morning.

good morning.

Wonder if you can talk about the price increases that went in, in March, just the relative magnitude and the success of putting those through?

As John mentioned, the price increase that we actually announced in February, it was effective in March, and it was ranged between 5% and 8%, and we would say relative to our historical performance on price increases, we actually performed slightly better, somewhat better than we have in the past.

Okay, slightly better. Was there any, you know, did you experience any pre buy or anything like that ahead of the price increases? You talked about some of the cadence of order throughout the quarter.

I think there are always customers who try to buy ahead of the price increase, so I would say it was not as substantial in anyway, but we did see a slight move up in February and prior to the actual price increase, but I think it all washes out through the quarter.

Okay, great. And then, Chuck, in the guidance you mentioned expectations for in the market for $926 a ton in steel and $425 in copper. Is that what we should think about for the second quarter guidance for what you're assuming?

Yes, those are kind of the numbers we're seeing in the market. As Mark mentioned, there's a lag as those current spot prices work through our inventory and through cost of sales, of course, so it would be difficult do that with any precision, but those are kind of the expectations we have for the second quarter.

Okay, great. And then one quick last one. On EPC, you mentioned the moving parts we need to think about when they're a part of the portfolio. Were all of those included in the assumptions that went into the original accretion estimates?

Yes, but I have to remind you the accretion estimates excluded those.

Okay, so they excluded those one-time items ?

Because even as we're unable to do that today, we were certainly more unable do that in December.

Okay, just wanted to be clear on that. Thanks a lot.

thanks.

The next question is from Michael letter Mike Hallorand of Robert Baird.

Good morning, gentlemen.

Good morning, Mike.

When you think about the moving parts that you have, on when the price increases go into play, and when you consider the lags that you have, both in the commodities side and when it's effective with some of your OEM clients, are you looking at more normalized levels starting in 3Q or does that push out more in 4Q when you think about a more balanced price cost curve?

I would say by mid Q2 we should be at more normalized levels.

Okay, that's very helpful. Then the second one is on the industrial and commercial side. Could you talk about what kind of sequential trends you're seeing in that business? Any signs of a slowdown? I know on the HVAC side you talked about more seasonality and less seasonality, but any thoughts there would be great.

Sure. I would say that the commercial business orders look pretty good right now, but there are, you know, spots here and there where we'll have a bad day or a bad week, not bad, but not as good as we've seen in the past, so it's not as crisp as perhaps it was just eight months ago, but nothing that's alarming to us yet. We've noticed the comment I just made.

I appreciate it. Thank you.

The next question is from Nicole Deblase of Deutsche Bank. Please go ahead.

Hi, good morning, guys.

Good morning, Nicole.

I appreciate the commentary on how your customers responded to your price increases in March, but can you talk about how your competition responded? Are you seeing similar levels of increases from them?

We're not going to comment on what our competition is doing, Nicole. We have to stay focused on the price increases that we're announcing out there, so I'll let that one pass.

Okay, that's fine. Then if you could talk a little bit about generator growth in 1Q, that wasn't called out in the press release.

Sure, our global generator sales for the quarter were up 37%. We are seeing some benefits from the unfortunate situation in Japan, so we saw some of that benefit in the first quarter, we'll see some in the second quarter.

Okay. Any supply-chain issues that you're hearing from Japan?

We have spotty issues, but everything's within our guidance estimate.

Okay, thank you.

The next question is from Scott Graham of Jeffries. Please go ahead.

Good morning, and congrats, Mark and Jon.

Thank you. Good morning.

I have two sets of questions. The first is around raw materials and pricing. Mark, if I recall during, I believe it was the analyst day, or maybe shortly there thereafter, you indicated that your price increase announced in the fourth quarter was to offset copper at about 440. With copper in and around that range, can we take the more recent price increase to be targeting steel and other commodities inflation, and if so, is that the only price increase that we will need from here, and will that cover you?

I understand the question. So at the time that we were moving up from 380 to the 440 range. As I mentioned earlier throughout the quarter, copper was bouncing around between $415 and $445 for the quarter, but we were more concerned about steel.

We did have at the time that we did the second price increase, which was effective in March, we did have a view. Because we're on a lag, we did have a view of what was going to happen with steel. I would say to you that the price increase that we had announced had anticipated some of what we're seeing right now. You know, however, like I mentioned earlier, we can't predict with any certainty what's going to happen in terms of the run-up on commodities here, so we're going to continue to monitor very closely and make the best decision we can going forward.

Right. Is that your way of saying that at the current price increase if the realizations continue to run above historical rates that you would be covered at constant rates of metal prices right now.

We do believe that we will offset most of the inflation that we're experiencing with the price increases that we put in place.

Got it, thanks. Now, with the A. O. Smith acquisition, a lot of working being done behind that. Should we expect things to slow down on the acquisition side, and I don't mean versus the size of A. O. Smith, of course, it will slow from there, but just in terms of the way you're approaching M&A, post the A. O. Smith closing? Will anything change there?

You know, when you combine the two businesses we'll have a very healthy cash generation and that will be the result of these businesses coming together. I would say to you, we plan to continue our strategy of being a consistent acquire, and we'll continue to focus on acquisitions that deliver us technology or energy efficiency, global expansion of our footprint and then acquisitions that could give us synergistic benefits. Our pipeline still looks pretty good, and we are in the mode of continuing to investigate and look for opportunities that make sense.

Thanks very much.

The next question is from Steve Tuseau of JPMorgan.

Good morning.

Good morning.

Thanks for taking my questions. I'm curious as to what you think the source of the downgrade that your customers have put out there about the expectations for the year? Is that an April commentary or did you see them kind of change their views February-March timeframe? Just curious why they're changing that so early in the season here.

I would say that commentary came in early April, that we heard. I would guess that it's related to the whole housing situation overall. Perhaps there was some hope that there would be some rebound in the residential housing sector that hasn't occurred, but I can't say for certain.

Okay, great, thanks a lot. Appreciate it.

The next question is from Holden Lewis of BB&T. Please go ahead.

Thank you, good morning.

Good morning.

With respect to sort of the revenue trends, they're very strong. I think we had heard maybe some pre buying in advance of the end of the stimulus package provisions on the HVAC, and maybe some pre-buying you had in (inaudible) that you sort of referenced it seems like we were talking about a fair bit of pre-buying potential there and yet, frankly your gross in the commercial industrial business as well as your gross in HVAC was very, very strong. Did you see much pre-buy? Is that in there? Are the markets performing in despite of that pre-buy, or was there not much of a pre-buy to be worried about?

As we did mention, we did see some what of a pre-buy for the ISA, and that occurred in the fourth quarter, and we said that we thought it would all come out in the first quarter and I would say pretty much that's what we're seeing happen. So any other pre-buys would have been related to price increases, and as I had mentioned earlier, there were customers that we saw actually buying ahead of the marked price increases that would have pulled that volume into February, but as I mentioned earlier we believe it was washed out in the quarter.

Okay. And then do you feel the pre-buys that would have happened from pricing that pulled from Q2 to Q1 maybe largely offset the pre-buy that happened pulling from Q1 to Q4?

Our price increase went into effect in March, in the first week of March, so I'm not sure anything would have come out of the second quarter into the first quarter.

Okay. And then in the past, trying to get a sense of kind of the gross margin movers here on a year-over-year basis. You talked about the 70 biffs from blending in the acquisitions, but in the past you've kind of said, or told us what the incremental dollar impact from raw materials were sort of above and beyond price which gives us a sense of what you're doing underlying. Can you give us an update of what the negative dollar impact, net impact of raw materials were in the quarter with respect to Q2?

Holden, we were closer to being balanced in the first quarter, but I will remind you that we experienced a very significant amount in 2010, for the full year, so it's hard to view it on a one quarter price versus cost balance. So, as we are implementing this price increase, taking it in a longer term view, we are still behind in recovering our costs that we experienced over the last four to five quarters.

Okay. Fair enough. I guess lastly, you know the EPC transaction, it's been sort of bogged down for a little while. Obviously, some other questions have come out. Is there any risk that either this doesn't happen or there has to be some substantive change to the structure which then might materially impact the accretion and timing? What is the risk that it happens or doesn't happen in a substantially different way than you anticipated.

Any time you're dealing with the Department of Justice and their investigation, you don't know exactly what they're going to conclude, so I'm not going to say there's no risk. The best we can see, I don't believe there would be a material impact to the transaction the way we have talked about it and viewed it.

Okay. So you don't see the potential to have to spin-off any businesses that would change, I think it was 20%, 25% accretion number at this point?

I'm not go going into any details about what might, or might not happen, just simply because it's not concluded yet.

Okay, great, thank you.

The final question is from Bill Develum of Titon Capital Management. Please go ahead.

That's Titan Capital Management. I wanted to circle back to the high efficiency business. If we have calculated the numbers correctly, high efficiency products grew about 33% here in the first quarter and that's on top of a year ago first quarter that grew at something in the neighborhood of 57%. We're curious, how much of this growth that you're experiencing is as a result of acquisitions, versus organically the high efficiency is on a bit of a tear?

It's a fair question. I'm not sure I'm going to be able to answer it exactly. We're going to go ahead and calculate exactly how much from the acquisitions is in that number, but I don't think it's a significant part. You know, we have to remember that what was happening in the quarter, and that is that our industrial business was reacting and shifting from the standard efficient products, to the new NEMA premium regulated products, as a result of the ISA law that went into effect. So that certainly had an impact.

As you know, and as an example that John talked about today, for the last number of years we have been rolling out one new product after the other all focused on energy efficiency, and some of those products are now being use by our customers in the market, so it doesn't surprise us that we're seeing strong movement in that direction. Now, I don't believe those kinds of growth rates are sustainable at 57% every quarter in and quarter out, but we did have the impact of ISA in the quarter.

Do we recall correctly as you're working to calculate those numbers, that the 57% growth in the Q1 of 2010, that would have been a function of the HVAC rebates?

Yes. You're thinking about it exactly right, and that is that in we had two years of the federal stimulus impact that rewarded consumers $1,500 if they put in a high efficiency furnace, that's correct.

So to some degree, the fact that you're experiencing this high level of growth in the first quarter of this year, on top of what is, I guess I would say somewhat of a one-time benefit in the year ago quarter, is really telling as to just how strong some of the new regulations are benefiting you?

Well certainly they did benefit us, that's for certain. As John mentioned, we actually saw some of an unfavorable mix in our HVAC business as a result of the change in the consumer rebate from $1,500 to $500, so that went the other way on us during the quarter. The good news is that our customers don't believe they'll be a complete reform back to the old buying patterns.

Thank you. And then did you have those numbers calculated there, or did you want to circle back to us.

Bill, I don't have all of those figures from last year with me, but as Mark said, it's really a negligible amount that would be impacted by acquisitions.

So it really would be a semi rounding error and we can think of these numbers as being good indicators?

For the most part, yes.

All right, thank you both.

Thank you.

That concludes our question and answer session. I would like to turn the conference over to Mark Gliebe for any closing remark.

Thank you. Today I'd like to close my closing remarks and talk about Henry Kneuppel. Yesterday, Henry Kneuppel transferred out of the role of CEO of Regal Beloit, and Henry is now Chairman of the Board through the end of 2011. Henry will be retiring after 32 years of service, and six years as our CEO.

In the last five years with Henry as our CEO, our total shareholder returns have exceeded 100% If you know Henry, you are aware that he is one of the most genuine, personable, and yet incredible people that you will ever meet. He's been a great mentor and a personal friend to me, and I take comfort in knowing that he'll be available at any time. I hope you'll join me in thanking Henry for all of his contributions to the Company and wishing him well in his retirement.

Thank you for your interest in Regal Beloit, and thank you for joining our call.

Thank you for your time today, gentlemen. The conference has now concluded. concluded. You may now disconnect your lines.